The company issued a performance warning. There was a significant loss in the fourth quarter, and the scale was significantly higher than our expectations and that of the market. The company expects net profit to be 918-1.01 billion yuan in 2023, a year-on-year decrease of 84.57% to 85.97%, which is significantly lower than our and market expectations. The company's net profit for the first three quarters was 4.36 billion yuan, down 28% year on year. From this, it is calculated that the quarterly loss scale for the fourth quarter was between 3.35 billion to 3.4 billion yuan.

The company disclosed the following reasons for the year-on-year decline in earnings in 2023:1) due to market fluctuations and sharp interest rate hikes by European and American central banks, overseas financial asset valuations declined significantly, and overseas interest expenses increased dramatically; 2) revenue from some businesses decreased year on year; 3) credit asset impairment provisions increased year on year.

The growth in credit asset impairment provisions mainly comes from the financing business. The credit asset impairment provision for the second half of 2023 was 1.92 billion yuan (3Q/4Q: 260 million yuan/1.66 billion yuan), which had an impact on net profit of 1.68 billion yuan. We expect the impact on profit for the fourth quarter to be around 1.45 billion yuan. Credit impairment provisions for the full year of 2023 were 3.13 billion yuan, an increase of 87.6% year on year. Mainly due to impairment rebates on assets purchased and resold in the first half of 2022, forming a low base, but due to market decline, impairment provisions for financing business increased significantly year on year, and impairment provisions for leasing business declined year on year.

The company also announced the A-share repurchase plan. At the same time as announcing the performance warning, the company announced the A share repurchase plan: the amount to be repurchased for A shares is 300-600 million yuan, the repurchase price is no more than 12.78 yuan/share, and the repurchase period is not more than 3 months. As of February 2, the company has repurchased 138 million yuan.

Maintain a neutral rating. We adjusted the 2023 profit forecast based on the performance report, lowered the investment income assumption, and raised the credit impairment loss assumption. It is expected that investment income in 2024 is expected to reverse losses, and credit impairment losses will decline year-on-year, driving the 2024 profit to recover from its historical low level in 2023. Based on 0.3 times the 24-year net market ratio (the average net market ratio for the past 5 years was 0.35 times), we lowered the target price from HK$5.0 to HK$4.2, maintaining a neutral rating due to the high volatility of the company's profits.